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Month: April 2014

Shadow banking, a compendium

Shadow banking, a compendium

Sometimes, looking at your past work reveals not only the progression of a real-world trend but also a subtle shift in the narrative of the topic under discussion.

It used to be that the ‘shadow banking system’ encompassed a relatively select group of non-bank financial intermediaries – broker-dealers, the repo market, money market funds, SIVs, etc. That group grew enormously in the years before the financial crisis, but has since collapsed pretty significantly.

Nowadays the definition of shadow banks appears to have expanded to include a host of non-bank financiers like direct lenders, asset managers, hedge funds etc.

Here’s a selection of some shadow banking pieces that illustrates the trend.


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HFT – dazed and confused

HFT – dazed and confused

Dazed and Confused’s famous “School’s out” scene starts with a warning from a rather candid teacher: “This summer when you’re being inundated by all the American bicentennial fourth of July brouhaha. Don’t forget what you’re celebrating and that’s the fact that a bunch of slave owning aristocratic white males didn’t want to pay their taxes.”

It came to mind as I was reading Scott Locklin’s review of the new Michael Lewis book. I’m a big Lewis fan (a highlight of my career was being CCed in on an email to Lewis, which perhaps says something non-flattering about my career), but amidst this week’s “brouhaha” over Flash Boys, I think Scott makes some very interesting points.

I know a few HFT type people. One of ‘em might be even be as rich as Michael Lewis.  So far, all the ones I have met are clever and decent people, and I figure whatever they’ve managed to earn by the sweat of their brows, they deserve it. I’m not real pleased with the idea of a small group of decently paid, politically helpless nerds being the fall guys for a bunch of crooked oligarchs who don’t want to pay for their liquidity.

Michael Lewis: Shilling for the buyside

Reading list – The cockroach papers

Reading list – The cockroach papers

Why am I recommending a book about cockroaches? Three words: KNOW YOUR ENEMY.

As a newish New Yorker living in a decidedly old New York apartment building, the occasional cucaracha sighting is an inevitable event. Reading The Cockroach Papers by Richard Schwied is therefore STEP ONE in an ongoing war against these hideous creatures and an experience that is surprisingly informative and, sometimes, even, enjoyable.

For instance, did you know the only food cockroaches won’t eat is cucumbers?

And they are surprisingly social:

Schweid writes, “cockroaches, while not social insects in the entomological sense of bees or ants with clearly assigned tasks that benefit the whole community, do clearly take pleasure in the company of other roaches, and the aggression pheromones draw them together, eliciting their effects regardless of the sex or age.” Cockroaches reared singly develop more slowly and take longer between molts than do those reared in a group. Although those groups can be too big “just as development is delayed in young cockroaches if they are isolated, over-crowding also extends the time between molts. So there is yet another kind of pheromone, called a “dispersal pheromone,” and it serves as the chemical signal that it is time to look for a new, slightly roomier harborage. This chemical is found in the insects’ saliva, and has just the opposite effect of the aggression attractant, in that it repulses cockroaches and causes them to look elsewhere for harborage.”

In true New Yorker fashion, I’ve put my hard copy of the book into storage so the above excerpt is borrowed from the excellent Farnam Street.

Derivatives of derivatives

Derivatives of derivatives

While the outstanding amount of CDS has been shrinking, there is one pocket of the derivatives world that appears is growing pretty substantially – options on CDS indices. How much have these CDS index swaptions grown, you ask?

From a 2011 FT Alphaville post:

…. Citigroup revealed in “a brief CDX options primer” that the market for these financial instruments had surpassed an average $5bn in trading volume per week. And that’s just for options based on Markit’s CDX index — not even those on other credit indices …

Fast forward almost three years, and the latest estimate for weekly volume is, erm, somewhat higher.

… An average $60bn of CDS index options currently exchange hands per week … according to estimates from Citigroup based on data from the Depository Trust & Clearing Corporation (DTCC)….

CDS options market multiplies alongside questions (2011)
‘Swaptions’ trade leaps over regulatory hurdles (2014)